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Morgan Stanley-US ETF Weekly Update
January 14, 2013--Weekly Flows: $2.4 Billion Net Inflows
ETF Assets Stand at $1.4 Trillion, up 3% YTD
No ETF Launches Last Week
Vanguard Begins VWO Index Transition; Changes ETF Name
New Benchmarks for Two Van Eck ETFs
US-Listed ETFs: Estimated Flows by Market Segment
ETFs posted net inflows of $2.4 bln last week, the 8th consecutive week of net inflows
Net inflows were led by US Sector & Industry and International Equity ETFs, helping to offset outflows from US-Large Cap ETFs
After four consecutive weeks of net outflows, Fixed Income ETFs posted net inflows of $0.5 bln last week
ETF assets stand at $1.4 tln, up 3% YTD
13-week flows were mostly positive among asset classes; combined $69.1 bln net inflows
International Equity ETFs have exhibited net inflows of $29.4 bln over the past 13 weeks (62% into EM Equity ETFs)
Over the last 13 weeks, Leveraged/Inverse ETFs posted the largest net outflows of any category ($1.1 bln)
Despite the demand for income, US Dividend Income ETFs have had net outflows of $0.2 bln over the last 13 weeks
US-Listed ETFs: Estimated Largest Flows by Individual ETF
The Financials Select Sector SPDR (XLF) posted net inflows of $0.8 bln last week, the most of any ETF
This is the fourth consecutive week of net inflows for XLF (combined net inflows of $1.8 bln) and last week’s net inflows were its largest since the week ending March 16, 2012, when it posted net inflows of $1.0 bln
The SPDR S&P 500 ETF (SPY) had net outflows of $3.1 billion last week, the most of any ETF; prior to last week, SPY had posted net inflows for 7 consecutive weeks (combined net inflows of $25.7 billion over the period)
Over the last 13 weeks, the iShares MSCI Emerging Markets Index Fund (EEM) has the highest net inflows among all ETFs at $11.5 bln, accounting for almost 60% of the net flows into emerging market ETFs over the period
US-Listed ETFs: Short Interest Data Updated: Based on data as of 12/31/12
iShares Russell 2000 Index Fund (IWM) had the largest decline in USD short interest at $2.1 bln
IWM’s shares short are their lowest level since October 15, 2009
Interestingly, the Market Vectors Gold Miners ETF (GDX) exhibited the third largest increase in short interest while the SPDR Gold Trust (GLD), which holds the physical metal, had the second largest decline in short interest
Aggregate ETF USD short interest decreased by $70 mln over the past two weeks ended 12/31/12
The average shares short/shares outstanding for ETFs is currently 5.3%
Smaller ETFs by market cap may skew results (three of the top 10 with the highest % of shares short have market caps <$5 mln)
Retail ETFs consistently are some of the most heavily shorted ETFs (shares short as a % of shares outstanding)
Based on multiple borrowings and the ability to continuously create new shares, shares short as a % of shares outstanding can exceed 100% (only seven ETFs exhibited shares short as a % of shares outstanding greater than 100%)
US-Listed ETFs: Most Successful Recent Launches by Assets
Source: Bloomberg, Morgan Stanley Smith Barney Research.
Data estimated as of 1/11/13 based on daily change in share counts and daily NAVs.
$9.5 billion in total market cap of ETFs less than 1-year old
Newly launched Active ETFs account for 47% of the market cap of ETFs launched over the past year; PIMCO Total Return ETF (BOND) is the largest actively managed ETF with a market cap of $3.9 bln
No new ETF listings and 16 announced closures YTD
The top 10 most successful launches make up 72% of the market cap of ETFs launched over the past year
Five different ETF sponsors and two asset classes represented in top 10 most successful launches
The iShares Core MSCI Emerging Markets ETF (IEMG) posted net inflows of $94 mln last week, the most of any recently launched ETF
Five out of the top 10 most successful ETF launches over the past year invest in international equities and fixed income as new
ETF launches have increased the accessibility of these markets
request report
Source: Morgan Stanley
SEC in landmark ruling on Nasdaq plan
January 14, 2013--The Securities and Exchange Commission has rejected a move by Nasdaq OMX to provide brokerages with a certain type of new stock order, marking the first time the market regulator has disapproved of such computerised trading tools.
The unprecedented decision by the SEC points to the growing regulatory scrutiny of exchanges amid an industry outcry over conflicts of interest in the share trading business.
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Source: FT.com
Finra Lets Brokers Know of Trouble Areas .
January 14, 2013--Brokers recommending business development companies and leveraged loan products may want to tread a little more cautiously.
The investments top the Financial Industry Regulatory Authority's list of potentially unsuitable products for 2013.
Finra outlines its priorities at the start of each year in a letter to the broker-dealer firms it oversees. The firms scrutinize it closely, and often put their own spotlight on advisers' dealings in areas that are singled out as potentially problematic.
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Source: Wall Street Journal
T. Rowe Price, Legg Mason get approval to launch active ETFs
Analyst expects new products from Baltimore money managers this year
January 14, 2013--Baltimore-based money managers T. Rowe Price and Legg Mason Inc. may offer actively managed exchange-traded funds after receiving a thumbs up from regulators.
The Securities and Exchange Commission approved Price's application earlier this month to be allowed to issue active ETFs — the first, and most difficult, regulatory hurdle to entering the market.
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Source: Baltimore Sun
CFTC Grants Order to ICE Clear Credit Permitting Portfolio Margining of Swaps and Security-Based Swaps in a Cleared Swaps Customer Account
January 14, 2014-- Today the Commodity Futures Trading Commission issued an order granting a request made by Ice Clear Credit LLC (ICC), a Commission-registered derivatives clearing organization (DCO), pursuant to Section 4d(f) of the Commodity Exchange Act (Act).
The order sets forth terms and conditions under which ICC and its clearing members that are dually registered as futures commission merchants and broker-dealers may (1) hold credit default swaps (CDS) and security-based CDS in a cleared swaps customer account subject to Section 4d(f) of the Act; and (2) portfolio margin such CDS and security-based CDS held in the cleared swaps customer account.
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Source: CFTC.gov
FINRA-2013 Regulatory and Examination Priorities Letter
January 11, 2013--Each year, FINRA publishes its regulatory and examination priorities to highlight areas of significance to our regulatory programs. These priorities represent our current assessment of the key investor protection and market integrity issues on which we will focus in the coming year.
Since business and regulatory environments are fluid, FINRA continually assesses new risks and integrates them into the scope of its regulatory programs.
Business Conduct and Sales Practice Priorities
FINRA recognizes that retail investors have been challenged to find attractive returns within their risk tolerance. The current slow growth, low-interest-rate environment leaves retail investors
particularly vulnerable. Central bank purchases and investors’ efforts to lower balance sheet risk and shift assets to safer investments have contributed to an unprecedented compression of credit risk premiums and yields in the United States.1 At the same time, retail investors are increasingly shifting funds from equity to debt markets.
Investor appetite for yield, among other factors, has bid up market prices on investment-grade and high-yield debt, putting pressure on upside growth potential and creating significant downside risks. In this environment, FINRA is particularly concerned about sales practice abuses, yield-chasing behaviors and the potential impact of any market correction, external stress event or market dislocation on market prices.
Against this background, we intend to focus our examination efforts on the following areas.
Suitability and Complex Products-FINRA’s recently revised suitability rule (FINRA Rule 2111) requires broker-dealers and associated persons to have a reasonable basis to believe a recommendation is suitable for a customer. Given the market conditions discussed above, we are particularly concerned about firms’ and registered representatives’ full understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.
More specifically, we are concerned about:
XX the market risk exposures associated with interest-rate-sensitive investments and the corresponding alignment with customer risk tolerances given today’s low-yield environment;
XX credit risk exposures associated with investments where the creditworthiness of counterparties
may not necessarily be transparent to or align with the risk tolerance of customers; and
XX liquidity risk exposures associated with investments where the timing of cash flows or the ability to quickly liquidate positions may not align with customer cash flow needs.
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Source: FINRA
Bats Blaming Market Rules as Calls of Overhaul Grow
January 11, 2013--Bats Global Markets Inc., the stock exchange operator that acknowledged four years of trading errors, blamed the mistakes on regulations it says are too complex.
The rule violations at Bats, which canceled its initial public offering last year after its own computer systems kept the stock from trading, threaten to further erode confidence in U.S. stock exchanges. Operators including NYSE Euronext (NYX) have called for an overhaul of regulations that boosted high-speed trading and the fragmentation of equity markets to 13 stock exchanges and about 50 private broker-run dark pools from three dominant venues in the 1990s.
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Source: Bloomberg
Money funds moving to publish NAVs daily
January 11, 2013--Large money-market funds in the $2.7 trillion industry are moving to disclose the value of their funds each day, a decision that could impact the battle in Washington over further regulation.
On Friday, Fidelity Investments, Federated Investors Inc. (US:FII) and Charles Schwab Corp. (US:SCHW) became the latest in a growing group of large money market fund operators to take steps to make the move.
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Source: MarketWatch
CFTC Extends Public Comment Period on Rulemaking Enhancing Protections Afforded Customers and Customer Funds Held by Future Commission Merchants and Derivatives Clearing Organizations
January 11, 2013--– The Commodity Futures Trading Commission (CFTC) published in the Federal Register on November 14, 2012 a notice of proposed rulemaking that would adopt new regulations and amend existing regulations to require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants (FCMs).
Additionally, the proposed customer protection rule addressed certain related issues concerning derivatives clearing organizations (DCOs) and chief compliance officers (CCOs). The comment period was set to close on January 14, 2013.
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Source: CFTC.gov
Legg Mason Rises on Report of Interest From Buyout Firms
January 10, 2013--Legg Mason Inc. (LM), the money manager searching for a new chief executive officer, rose the most in four months after a report said two buyout firms have shown an interest in taking it private.
Legg Mason climbed 3.2 percent to $26.84, the biggest gain since Sept. 11, after Reuters said today that two large private- equity investors showed interest in financing a buyout led by the Baltimore-based firm’s largest affiliates. Legg Mason’s board has refused to engage in discussions about a sale, said Reuters, citing unidentified people with knowledge of the matter.
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Source: Bloomberg
